Income or accumulation units?

gterr

Hi there,

I am soon to open a S&S ISA with Hargreaves Lansdown. Initially I'll be wanting the value of the fund to grow, but in a few years I'll want an income.

Taking the Vanguard LifeStrategy funds as an example, I could initially buy accumulation units, then later switch these to income units. However, there is an initial charge, not 100% rebated, for buying these funds through H-L, so the switch would not be free. Would I be better off buying income units at the outset and opting to reinvest the income until I'm ready to take it?

Any other things I should bear in mind when deciding between accumulation and income units?

Thanks for your time.

grey_gym_sock

yes, there's the cost of switching. and you'd be out of the market for a day.

you can set up an HL account to reinvest dividends automatically, though there is a minimum of £50 per reinvestment; if there's less, the cash would just sit there until there's enough.

gterr

grey_gym_sock wrote: »

yes, there's the cost of switching. and you'd be out of the market for a day.

you can set up an HL account to reinvest dividends automatically, though there is a minimum of £50 per reinvestment; if there's less, the cash would just sit there until there's enough.

Yes, thanks. However, if I went for income units then when the dividends were reinvested this would presumably involve the purchase of new units, incurring the usual initial charge for those units.

What happens with accumulation units over time? The number of units doesn't change, but the value of each unit increases?

I'm thinking ahead to a situation where I've invested over, say, five years and now have, say, £75k of accumulation units. To switch all these to income units if there is an initial charge is going to incur quite a fee, isn't it? I am trying to get clear in my head if I would fare better with income units from the start.

(This is based on the assumption that I was invested largely or wholly on funds for which there is an initial fee at purchase. I might in practice have a mixture of holdings. Also, I realise that pricing structures and platform charges may change.)

xylophone

Go to HL - run a fund with acc units against the same fund with inc units using the graph tool. This will illustrate what happens.

jimjames

With HL there is generally no initial fee on buying any funds. The bigger issue would be the minimum reinvestment amount which could mean your dividends are waiting some time before being invested. With other platforms the reinvesment happens immediately regardless of amount.

Eponym

jimjames wrote: »

With HL there is generally no initial fee on buying any funds.

Vanguard charge a dilution levy for the Lifestrategy funds; that might be what the OP means.

gterr

Eponym wrote: »

Vanguard charge a dilution levy for the Lifestrategy funds; that might be what the OP means.

Yes, that's right. If I decided to stay with Vanguard LifeStrategy funds and switched from accumulation to income units I would have to pay that initial charge on all the accumulation units when I switched, which could be substantial.

I probably need a crystal ball to answer my own question, because all sorts of things could change in the next 5 years or so regarding platform charges, and I may have changed my funds by then anyway, but I was just trying to get my reasoning straight.

One thing that was bothering me was whether the reinvestment of income from my income units would impinge on my ISA subscription limit for that year (i.e. would it count as part of my annual allowance). I've just given HL a ring and apparently it would not: if I asked for the income to be reinvested it would stay within the wrapper and not be regarded as "new cash" into the ISA.

My thoughts just now are to go with the income units. I can't see any huge disadvantages with that (but feel free to set me straight!)

Thanks for your time.

westy22

If you have a look at this link you can see that, in many instances there has been a slightly better performance record for the Income units against the Accumulation units https://www.vanguard.co.uk/uk/mvc/investments/mutualfunds#mf_perftab

MrTyo

Sorry further to this can someone just clarify, apart from the obvious that accumulation units re-invest, what are the advantages of acc funds rather than inc. My understanding would be that regular investing in funds helps spread the costs i.e sometimes buying higher sometimes lower etc so you are not buying lots in one go. This is great during the accumulation peroid but say when it comes to retire and you wish to start obtaining an income then surely unless you were selling the acc funds off peicemeal you would be looking to sell a large amount at one time, to perhaps switch to something that would generate an income which may not be the right time to sell? Whereas if you had Inc funds from the start and manually reinvested you wouldnt have to sell come the end? If that makes sense....

jamesd

Income from investments within an ISA doesn't count against your ISA contribution limit.

Use Acc if you're sure you want to buy more of the same fund. Use Inc if you might want to buy different funds or maybe if you want the income or to avoid future charges.

While the switching costs are a factor, the HL platform charge of £2 a month may be a bigger factor for you is you use Vanguard funds. It may be cheaper to start with other funds and switch later.

donniej

Some providers offer switching for income to accumulation units at no charge. It's known as a unit conversion; you're not actually selling out of the fund or buying units, you want your existing units to be in the income rather than the accumulation share class.

It might be worth phoning HL and asking if they will do this for you.